Sign in

The Fountainhead

At five to ten on a brisk morning a couple of months ago, Alan Greenspan, the chairman of the Federal Reserve System, walked into Room 216 of the Hart Office Building, on Capitol Hill, holding a bunch of newspapers under one arm, the pink Financial Times visible on the outside. He was dressed much as he usually is: black shoes, dark socks, a gray suit with a faint-pink chalk stripe running through it, a light-blue button-down shirt, and a dark-red tie. At the age of seventy-four, Greenspan has a face that resembles that of a mountain rescue dog. Lines on his forehead are not mere wrinkles but waves etched into his skull. He has sad brown eyes, a big, bulbous nose, and a long, narrow mouth, the corners of which are often turned down, giving him a mournful cast. He walked to the front of the room, sat at the witness’s table, opened a bottle of water, and poured himself a glass. The manufacturer’s label had been removed from the bottle so that he wouldn’t appear to be endorsing a brand. He looked as nervous as Tiger Woods on the practice tee.

Greenspan was on Capitol Hill to deliver a twice-yearly report on monetary policy to the Senate Committee on Banking—one of the few concessions to accountability in a role that was designed to be above electoral politics. In recent years, however, Greenspan’s appearances on Capitol Hill have often been less like congressional hearings than like regal audiences. This one started out along the same lines. At ten o’clock, Senator Phil Gramm, the Texas Republican who chairs the committee, got things going by reviewing the Fed’s policy of raising interest rates, which began last June and has resulted in five successive hikes, each of a quarter point, the most recent of them occurring last month. “I’m not going to get into the business of trying to second-guess the monetary policy of the most successful central banker in the history of the United States,” Gramm declared in his exaggerated Texas drawl. Greenspan explained why the Fed had felt compelled to increase interest rates. The economy, partly fuelled by the stock market’s remarkable rise—the so-called “wealth effect”—was growing too rapidly. Although there were few signs of rising prices at the moment, the pool of available workers was dwindling, and the level of imports was growing strongly. Neither trend could continue indefinitely without sparking inflation. The Fed needed to restrain the economy, and this could be done only by raising the cost of borrowing.

The senators listened in respectful silence, but then something surprising happened. Jim Bunning, a Republican from Kentucky, started it, by labelling Greenspan’s policy “misguided” and saying it could easily “become more of a threat to our economy than inflation will ever be.” Paul Sarbanes, of Maryland, the senior Democrat on the committee, followed up, describing a recent visit to a job-training program in Baltimore, where he had met a troubled youth who had just found his first job. “This young fellow, he’s far removed from the wealth effect,” Sarbanes said. “He’s barely struggling to get into a job situation. Now, what’s going to happen here?” Other senators began to grumble, too, and even Gramm ended up sounding a semi-critical note. “I think people hear what you are saying and conclude that you believe that equities are overvalued,” he told Greenspan. “I would guess that equity values are not only not overvalued but may still be undervalued.” The Fed chairman stared through thick spectacles, his hands clasped in front of him. Occasionally, he appeared to gulp for air, like a goldfish. At one point, he tried to engage Bunning, but he was quickly interrupted. “If we get prime interest rates at double digits, we are going to stop this economy in its tracks,” the Kentucky Republican snapped. “I don’t want to see that happen on your watch, and I surely don’t want to see it happen on my watch.” Greenspan realized it was hopeless. “I appreciate that, Senator,” he said quietly. “I have the same view.”

In the weeks following the hearing, as the stock markets shot up and down like a stunt plane with a drunken pilot in the cockpit, criticism of Greenspan spread to the media. The editorial pages of the Times and the Wall Street Journal, which usually agree on little, both questioned the Fed’s logic in raising interest rates; John Crudele, whose financial column in the New York Post is widely read on Wall Street, went so far as to suggest that the Fed chairman should resign while the going was good. The attacks on Greenspan, who has been in his job since August, 1987, didn’t go unnoticed. A couple of weeks ago, I ran into a senior Fed official with more than twenty years’ experience and asked him to compare Greenspan’s current situation with that of October, 1987, when the stock market crashed. “I think he is facing his greatest challenge now,” the official said. “We are suggesting, as an institution, that the stock market is too high, and that we are going to rein in inflation that’s not there yet. What he did in 1987 was important, but it was what you would expect a central banker to do—try to calm the markets and assure financial stability. This is much less straightforward.” While I was considering that statement, the official added another variable to the equation: “We’ve lost Bob Rubin as Treasury Secretary, and Larry Summers”—Robert Rubin’s replacement—”able man that he is, doesn’t have the same credibility or experience. That leaves Alan with his hands on the wheel. He is really exposed.”

Greenspan may be exposed, but he is also a survivor, perhaps the greatest survivor in all Washington. This past January, President Clinton nominated him for a fourth four-year term as Fed chairman. In length of service, Greenspan has now surpassed all his predecessors save two. Assuming he remains healthy—and he has never had a major illness—he will complete his fourth term at the start of 2004, when he will be seventy-seven. “He strikes me as being completely unfazed by critical editorials,” Roger Ferguson, the Fed’s vice-chairman, who has served alongside Greenspan for two and a half years, told me recently. “He is clearly a man who understands that he has been put in place by the President and Congress to execute a mission. Sometimes it will make him a cover boy and sometimes performing the role will get people saying things that aren’t so positive.” The veteran NBC News correspondent Andrea Mitchell, who has been married to Greenspan for three years, made a similar point when I spoke with her on the telephone a few weeks ago. “When he made the decision to accept renomination, which was a great honor, he knew that at that moment things were as good as one could imagine them being,” Mitchell told me. Far from becoming disheartened by the criticism, Mitchell said, Greenspan thrives on it. “Other people would be daunted by the ups and downs, by the fact that you are only as good or bad as your last decision, that you can’t ever rest on your track record. I would find that more than a little frightening. He finds it exhilarating.”

“Exhilarating” is not a word many people associate with Greenspan, but there is more to him than the lugubrious figure who appears on C-span and CNBC. He was born on March 6, 1926, in New York City. His parents were both Jewish: Herbert Greenspan, a self-educated financier, and Rose Goldsmith, a fun-loving girl of seventeen who liked to sing and dance. Three years after Greenspan was born, Herbert and Rose divorced. Rose moved back in with her parents, in Washington Heights, and took a job in a furniture store across the Harlem River, in the Bronx. Greenspan was brought up as the only child of a single mother, to whom he remained devoted. (He called her practically every day at seven in the morning until her death, in 1995.) His cousin Wesley Halpert lived nearby, and the two boys would spend hours imitating Laurel and Hardy and playing ball. A few weeks ago, I visited Halpert, who, at seventy-six, is a busy dentist on the East Side. He turned out to be a tall, broad-shouldered man, with a full head of white hair, and the same calm presence and measured way of speaking as his famous cousin. After doing his last fillings of the day, Halpert sat down and talked about Washington Heights before the Second World War. Then, as now, it was a neighborhood of working-class immigrants and their children. Most of the immigrants had come from Europe, rather than the Caribbean and Latin America, as is the case today, but the ethnic lines were just as sharp. “We were all afraid of the Irish kids,” Halpert told me. “One day, we were invaded by a bunch of them. Alan and I were playing ball against a wall. They were all bigger and older than we were, and there were a lot of them. They started tormenting us, and Alan sailed right into them, his fists going like this”—the old man pumped his fists up and down like a young Mike Tyson—”and we chased them away.”

A photograph of Greenspan from his days at George Washington High School, on West 192nd Street, shows a tall, loose-limbed youth, with dark wavy hair, in an old-fashioned swimsuit. He didn’t display much interest in his studies except for arithmetic. “He knew all the baseball averages,” Halpert recalled. “He loved numbers.” Most kids in Washington Heights supported the New York Giants, but Greenspan was a Brooklyn Dodgers fan. Music was another passion, which he inherited from his mother. At family gatherings, Greenspan was a star attraction. His uncle, Halpert’s father, would give him a dime to sing the Depression song “Brother, Can You Spare a Dime?” “He’d sing it in a lovely boy’s voice,” Halpert said. When Greenspan finished high school, he applied to Juilliard and spent two years there, studying the saxophone and the clarinet. In 1944, at the end of his sophomore year, he dropped out and decided to try to make some money by playing professionally.

It was the beginning of the bebop era. Jazz orchestras, featuring virtuosos like Dizzy Gillespie, were starting to emerge; and some of the old swing bands were forced to update themselves. One such outfit was the Henry Jerome Band, which played regularly at the Childs restaurant in the Paramount Theatre building, in Times Square. The band’s manager, who also played in its horn section, was a young law student named Leonard Garment—the same Leonard Garment who went on to become President Nixon’s counsel during Watergate. Garment still recalls the day when Alan Greenspan showed up at the Paramount. “He had exactly the same face, a slightly ironic, self-measuring smile, very interior-oriented,” Garment told me a few weeks ago. “I played jazz tenor saxophone. Alan came into the band and played the other tenor saxophone, and he also played the clarinet and the flute. He was very good, very solid.” Greenspan stayed with the band a year, during which time it alternated between touring and playing in New York. Even on the road, he was quiet and reserved. He put his interest in numbers to good use, assisting Henry Jerome, the bandleader, with the bookkeeping, and aiding some of his fellow-players with their income taxes, always a problem for itinerant musicians. In other areas, too, he helped to keep his colleagues in line. Above the Childs restaurant was a Walgreen drugstore that had a row of phone booths. Some of the musicians used the booths to smoke marijuana, and the drugstore manager would complain to Garment. When Garment didn’t have time to retrieve the miscreants himself, he would dispatch his fellow tenor sax to do the job. “I’d say, ‘Alan, could you get some of those guys down here? Tell them it’s time to play and to stop smoking,’ “ Garment recalled.

Greenspan enjoyed the show-business life, but soon realized it wasn’t a viable career. “I was a pretty good amateur musician, but I was average as a professional, and I was aware of that because you learn pretty quickly how good some professional musicians are,” he told Steven Beckner, a journalist who wrote a book about Greenspan. “I realized it’s innate. You either have it or you don’t.” During his time in the band, Greenspan had started reading books about business and finance, and he found them fascinating. In 1945, he quit and started taking classes at New York University’s business school, which was then called the School of Commerce.

Back in the forties, N.Y.U. was not the vibrant, cosmopolitan institution it is now. The economics department, in particular, was known as a citadel of conservatism. Ludwig Von Mises, the Austrian scourge of socialism, taught there, as did Walter Spahr, the head of the National Committee to Return to the Gold Standard. Robert Kavesh, who went on to become a professor of economics at N.Y.U., was in the year behind Greenspan. “We met when I got out of the Navy, in 1946,” Kavesh told me recently. “We spent a lot of time together at lunchtime. We would walk around Washington Square. Picture multitudes of former servicemen standing in the sunshine, and just a few women. That’s how it was. Alan was always painfully shy, and I think it hurt him with the girls. Let’s just say he wasn’t too successful. He was a very quiet person. He was interested in most of the things people in their early twenties are interested in: he was interested in baseball; he was interested in girls; and he was also interested in economics, which was a very exciting subject in those days.”

It was during one of Walter Spahr’s antediluvian lectures that Kavesh noticed Greenspan ignoring the professor and reading “The Economics of John Maynard Keynes,” by Dudley Dillard, one of the first books about the legendary British economist to be published in America. Keynes, whose theories were designed to justify active management of the economy by the government, was then anathema at N.Y.U., and at most other American universities, but Kavesh was not surprised to see his friend reading about him. “He was trying to absorb everything and every point of view,” Kavesh told me. “He loved economics, and he loved those simple diagrams of savings and investment that really were the Keynesian contribution. We would talk, and he would get truly animated. He was not a from-birth conservative, not at all. In fact, it was presumed that everyone in our circle was a Democrat, because the role of government in economic life had been well established by the war, the financing of the war, and the ending of the Depression. We were truly all Keynesians.” In 1948, Greenspan graduated summa cum laude, and although he received his master’s from N.Y.U. two years later and also enrolled in night classes at Columbia, he showed little interest in pursuing an academic career. (He finally obtained his Ph.D., from N.Y.U., in 1977, after submitting a thesis on the stock market and investment which he had started working on more than twenty years previously.) “It was presumed if you studied economics seriously in those days that you would go on to be a teacher,” Kavesh said. “There was a hierarchy. The highest level was to teach; second, to work for government; third, sully your hands in the business world. Alan chose the last approach.”

Greenspan likes to remind people that he has been observing the United States economy on a daily basis for more than half a century. In 1948, he took a job with the National Industrial Conference Board, a New York research group financed by big corporations. One of the businessmen who called for advice about the economy was William Townsend, a veteran Wall Street bond trader. Townsend was impressed by Greenspan, and in 1953 he asked him to join his firm as a partner. The offer came with an annual salary of around six thousand dollars, not much money even then, but it was a partnership, and Greenspan accepted. The decision made his career. During the next two decades, he built Townsend-Greenspan & Company into a thriving economics consultancy, with a roster of corporate clients that included Alcoa, U.S. Steel, and J. P. Morgan. (Townsend died in 1958, but his young partner left his name on the door.)

From the beginning, Greenspan’s approach to the economy was heavily empirical. Townsend-Greenspan analyzed the various economic statistics that emerged on a daily basis from the Commerce Department and other government agencies, then provided its clients with a judgment about what they implied for the future growth of the economy. Greenspan became an expert on the national income accounts, the complicated statistical framework that the government uses to calculate the gross domestic product, but he also studied the individual sectors that his clients operated in, such as steel and banking. “I was at various times a specialist in virtually every major industry and generally knowledgeable about the remainder,” he told Lawrence B. Lindsey, who was a Fed governor from 1991 to 1997. “When you go through every industry over your lifetime, you should know how the system works.”

In many ways, Greenspan’s job hasn’t changed much since the fifties. He is still paid to analyze economic trends and predict future developments. The difference is that, along with other members of the Federal Open Market Committee, which is the policymaking arm of the Federal Reserve System, he now gets to set interest rates, not merely analyze them. Every morning, Greenspan is picked up at his home, in Northwest Washington, by his official car, a black Mercury Grand Marquis, and driven to the Fed’s headquarters, in Foggy Bottom. When he’s not in meetings, Greenspan spends much of his time alone in a big, bright office overlooking Constitution Avenue, doing what he likes best: studying and thinking. On average, he spends two or three hours each day doing his own economic research, and at least another two or three hours reading reports prepared by the Fed staff and others. A visitor to his office earlier this year discovered Greenspan knee-deep in economic statistics dating back to the nineteen-fifties. He explained that he was trying to revamp a forty-year-old mathematical model that Townsend-Greenspan had used to estimate the total realized capital gains on sales of existing homes. (The figure is significant to economists because people can use money they make from home sales to finance extra consumption.) Home sales aren’t Greenspan’s only research interest. Last year, he and Darrel Cohen, a staff economist at the Fed, published a paper in The Review of Economics and Statistics which detailed a new way to predict the total number of motor vehicles sold each year in the United States—surely the first time a Fed chairman has published a refereed academic paper while in office.

Greenspan’s knowledge of the economy regularly surprises his colleagues. “I remember one instance when spring floods were making many of the bridges on the Mississippi River unusable,” Lindsey wrote in a recent book, “Economic Puppetmasters.” “At the time of the weekly Board of Governors meeting, the U.S. economy was literally linked together by a single bridge. Greenspan not only knew the location of the bridge, but also the various reroutings that could be used to get merchandise there.” Greenspan isn’t just a fact gerbil. (Data by itself is vacuous, he often says.) Like all good economists, he looks at a wide range of numbers and then tries to find a conceptual structure that will explain them. “He’s not a monetarist, he’s not a Keynesian—he’s himself,” William McDonough, the president of the Federal Reserve Bank of New York, told me when I visited his office on Liberty Street a few weeks ago. “It’s not just a tremendous interest in the data for its own sake but, rather, he draws conclusions from the data which are insightful and unique.” Many economists rely on complex computer models to predict the future, but Greenspan has long been suspicious of such methods. Back in the sixties, Townsend-Greenspan acquired a new computer with a memory of sixteen kilobytes, which was then considered enormous, to use for economic forecasting. “We thought we could really pin down the business cycle,” Greenspan told a meeting of business economists a few years back. Unfortunately, the economy didn’t coöperate. “It moved. . . . It wigged when it should have wagged.” Greenspan drew an unequivocal lesson from this experience. “That crazy economy out there doesn’t stand still long enough for us to get a fix on it. . . . Our computer models are running at an accelerating pace, but the economy manages to keep that much ahead of us.”

As 1952 began, Greenspan had a good job, a duplex apartment in Forest Hills, which he shared with his mother, and a promising future. By the end of the year, his mother had moved out and been replaced by a wife, a pretty young painter named Joan Mitchell. Last month, I visited Joan Mitchell Blumenthal, as she is now called, at the East Side apartment she shares with her second husband, Allan Blumenthal, a psychiatrist. At the age of seventy, she is still strikingly attractive, with blond hair, blue eyes, and a reserved manner. She sat down in a leather armchair, quieted her toy poodle, pulled her knees up beneath her, and recounted meeting Greenspan, on a blind date organized by a friend, shortly after she moved to New York after graduating from U.C.L.A.: “The first date was lovely because during our first telephone conversation he laid out three things we could do. One of them was a sporting event, another was a Broadway show, and the third was a concert at Carnegie Hall involving some Bach. I said, ‘Without a doubt, the concert at Carnegie Hall. I’ve been dying to go there all my life.’ We went, and it was very enjoyable. We talked a great deal about music. He told me about the Henry Jerome Band and all that, and later, in fact, we went to the hotel where the band was playing, and I met the band members. They told me they knew Alan wouldn’t stay with them forever because he was just too good at doing their taxes.”

Mitchell Blumenthal found Greenspan smart, sweet, and charming. Following an eight-month courtship, they got married in a small ceremony at the Pierre Hotel; but after the wedding things didn’t turn out as planned. “I can only tell you that it had nothing to do with respect for each other, or even fondness for each other, but a real difference over what we wanted out of life,” Mitchell Blumenthal said. “I found life a little dull. I wanted to have fun; he wanted to play golf. I didn’t want to live in Forest Hills; he did want to live in Forest Hills. It was like that.” After living together for ten months, the couple separated amicably, and they still talk now and again. In the early fifties, the only ground for divorce in New York State was infidelity, and neither Greenspan nor Mitchell Blumenthal wanted that. “We found out that you could get an annulment much quicker and more cheaply than a divorce,” Mitchell Blumenthal explained. “Which is why, I think, for a long time after he became famous people didn’t know that he’d been married before.”

The failure of the marriage left a lasting mark on Greenspan—it would be more than forty years before he remarried—but it was through Mitchell Blumenthal that he met a woman who became his close friend and intellectual mentor: Ayn Rand, the Russian-born novelist, libertarian, and libertine. A couple that Mitchell Blumenthal knew, Barbara and Nathaniel Branden, were friends of Rand in California. Shortly after Mitchell Blumenthal moved to New York, the Brandens and Rand did likewise. Rand, already famous for her 1943 novel, “The Fountainhead,” took an apartment on East Thirty-sixth Street, and continued work on “Atlas Shrugged.” Later, she moved to a larger apartment a couple of blocks south. Every Saturday night, she would invite a group of friends to her apartment to read and discuss her latest writings. (As ironic as ever, Rand later dubbed the right-wing reading group the Collective.) Mitchell Blumenthal tried to interest Greenspan in the gatherings, but he didn’t start attending regularly until after the two of them had split up. In “My Years with Ayn Rand,” a memoir published last year, Nathaniel Branden gives a memorable portrait of Greenspan as he appeared to Rand and her acolytes: “He was tall and solidly built, with black hair, dark horn-rim glasses, and a propensity for dark, funereal suits. At age twenty-six, he was somberness incarnate, looking chronically weary, resigned, and unhappy. Barbara, Ayn, Frank”—O’Connor, Rand’s long-suffering husband—”and I once encountered him as he and Joan were coming out of an elevator. ‘He looks like an undertaker,’ Ayn commented.”

Greenspan has never been shy about acknowledging his intellectual debt to Rand. “What she did—through long discussions and lots of arguments into the night—was to make me think why capitalism is not only efficient and practical, but also moral,” he told a reporter from the Times in 1974. When Greenspan met Rand, he saw himself as a logical positivist, believing that all moral codes were arbitrary human constructs that cannot be verified. Rand regarded logical positivism as a dead end. In her controversial philosophy of objectivism, she argued that capitalism was innately superior to other socioeconomic systems, such as feudalism and socialism, because it was based on voluntary exchange on the part of rational, self-interested individuals. The laudatory descriptions of capitalism contained in the drafts of “Atlas Shrugged” struck the young Greenspan as inspired. “Ayn, this is incredible,” he blurted out at one meeting described by Branden. “No one has ever dramatized what industrial achievement actually means as you have.”

Rand, for her part, initially acted coolly towards the newest member of her coterie. “The trouble with A.G. is, he thinks Henry Luce is important,” she said on one occasion. “Do you think Alan might basically be a social climber?” she inquired on another. Eventually, Rand was won over by the clarity of Greenspan’s mind and the breadth of his knowledge. “It took a long time to impress that lady, but he did it, and in fact she once told me, some years later, that he was perhaps the most sensitive reader from a literary point of view that she’d ever had,” Mitchell Blumenthal said. Rand and Greenspan became close, though, contrary to speculation, they never had a sexual relationship. (Rand did have young lovers, Nathaniel Branden among them.) As the years went by, many members of Rand’s circle split from her in rancorous circumstances, but Greenspan continued to see her regularly until her death, in 1982. Even today, he speaks highly of Rand. “She did things in her personal life which I would not approve of, but ideas stand on their own,” he said to one recent visitor. “What was a syllogism back then is a syllogism today.”

When Robert Kavesh, Greenspan’s college friend, returned to New York, in 1956, after getting his Ph.D. and teaching at Dartmouth, he was surprised to find Greenspan’s “whole approach to economics changed” almost beyond recognition. “We were fast friends once again, but he was trying to sell me that Ayn Rand philosophy with no success—not my stuff,” Kavesh told me. “He had become a markets, markets, markets person: what you need is pure, unadulterated laissez-faire.” In the early sixties, Greenspan contributed some economics articles to The Objectivist Newsletter, which, to this day, make provocative reading. In one piece Greenspan attacked efforts by the government to restrain corporate monopolies, arguing that “the entire antitrust system must be opened for review”; in another he said that the welfare state, “stripped of its academic jargon. . . is nothing more than a mechanism by which governments confiscate the wealth of productive members of a society to support a wide variety of welfare schemes”; and in a third article, lambasting the very idea of government regulation, he maintained that capitalism “holds integrity and trustworthiness as cardinal virtues and makes them pay off in the marketplace, thus demanding that men survive by means of virtues, not of vices. It is this superlatively moral system that the welfare statists propose to improve upon by means of preventive law, snooping bureaucrats, and the chronic goad of fear.”

Quotes like these are hard to square with contemporary descriptions of Greenspan from his colleagues and friends. (Alice Rivlin, a Fed governor from June, 1996, to July, 1999: “He’s not very ideological.” Andrea Mitchell: “He is not doctrinaire.” William McDonough: “Broad-gauged. He would have been the perfect P.P.E.”—politics, philosophy, and economics—”candidate at Oxbridge.”) One possible explanation for the difference between Greenspan circa 1960 and Greenspan circa 2000 is that his views have changed. “I think what’s happened is that he has come to see that life is a little more complicated than Ayn Rand had pictured,” Robert Kavesh said to me. “If you’ve ever read her stuff, there’s black and white, there’s good and evil, there’s absolutism and relativism. Relativism is the worst thing you could be convicted of. I think Alan has come to realize that life is sort of gray in many respects.” The problem with Kavesh’s argument is that its subject doesn’t agree with it. During a recent conversation with a fellow-economist, Greenspan insisted that his general view of how the world works has not changed much at all since the nineteen-fifties. He also warned his interlocutor to distinguish carefully between what he believes personally and how he acts as chairman of the Fed.

That was sound advice. In an idealized free market, of the type Rand rhapsodized about, there would be no need for a central bank, let alone active economic management of the type associated with Keynes and his followers. But Greenspan has not survived as long as he has in Washington by being perceived as a right-wing ideologue. On the contrary, he has cultivated an image as a pragmatic policymaker who is willing (and able) to work with people of all political stripes. A good example of this was his reaction to the Mexican financial crisis, which erupted in early 1995. With the Mexican government struggling to pay its debts, and billions of dollars of Wall Street money at risk, many of Greenspan’s fellow-Republicans argued against a bailout, because it would only encourage investors to act equally rashly in the future—a problem known to economists as “moral hazard.” Greenspan privately supported some of these arguments, but he nonetheless agreed, along with Treasury Secretary Robert Rubin and Lawrence Summers, who was then a Treasury under-secretary, to a rescue package for the Mexican government that included some nineteen billion dollars guaranteed by the United States. (All the money was later repaid, with interest.) “His view, which I think was right, was that what we did in Mexico had a moral-hazard aspect to it that was unattractive,” Rubin told me recently when I visited his office at Citigroup, where he is now a senior executive. “On the other hand, life is very often a choice between unattractive alternatives, and the question is which is the least unattractive. His view there, and it was also Larry’s view and my view, was that the moral-hazard aspect was a by-product of doing something else so important—avoiding Mexico going into default, with possible contagion effects—that you simply had to accept the negative effect in order to get the greater good.” Rubin tossed a small glass globe from hand to hand. “That’s a mode of thinking that, unfortunately, is very hard for some people in Washington to relate to.”

When the financial crisis spread to Asia, in the summer of 1997, Greenspan again rejected arguments that the United States government should do nothing. Together with Rubin and Summers, he encouraged Western and Japanese banks to roll over Korea’s debts and helped persuade a reluctant Congress to approve a big increase in United States contributions to the International Monetary Fund; emergency loans worth tens of billions of dollars were extended to the stricken Asian countries, most of which are now enjoying economic recoveries. According to Rubin, Greenspan’s ability to work effectively with him and Summers depended on the willingness of all three to set ideology aside and focus on practicalities. “Larry and Alan are both very strong personalities, smart as hell, and they both have views. I have views, too,” Rubin said. “Yet it worked out remarkably well, and it was very important. People don’t realize how close we came to disaster. The whole system almost came off the rails.”

The most striking example of Greenspan’s intellectual flexibility was his willingness to keep interest rates low in the second half of the last decade. Until a few years ago, most economists, Greenspan included, believed the maximum rate at which the economy could expand without sparking an upturn in inflation was about two and a half per cent a year. Between the fourth quarter of 1995 and the fourth quarter of 1999, the economy grew at an annual rate of more than four per cent, but it was not until last June that the Fed raised interest rates, and even then it acted gradually. As a result of this permissiveness, all sorts of good things happened: wages of nonsupervisory workers jumped significantly, thereby spreading some of the spoils of prosperity; unemployment fell to levels not seen since 1970, and among blacks and Hispanics the jobless rate fell to all-time lows; and inflation, far from rising, as the old theories predicted it should, fell. This upsurge in non-inflationary growth was facilitated by economic troubles abroad and falling commodity prices, but the key factor at home was a doubling in the growth rate of productivity—the amount of output produced by each worker—to three and a half per cent a year. Greenspan didn’t engineer this transformation, but he was one of the first economists to recognize it as more than a temporary blip. As long ago as 1997, he had suggested that what was happening in the economy, with the proliferation of information technology, and the Internet in particular, may turn out to be a “once or twice a century” occurrence. Under his leadership, the Fed allowed the productivity resurgence to take place, and did not interrupt it out of a fear that rapid economic growth would spark inflation, which a more hidebound central bank would have done. “I think that’s his greatest achievement,” William McDonough, the New York Fed president, who has been vice-chairman of the Federal Open Market Committee since August, 1993, told me. “Now, one can argue that it’s been the F.O.M.C.’s greatest achievement, but the fact is Alan’s been not only the chairman but the intellectual leader.”

The Fed’s policy of watchful inaction helped to sustain a virtuous circle in the economy. With interest rates low and consumers optimistic, American firms invested at record rates, especially in information technology. All this new investment paid off in higher productivity growth, which, in turn, led to increased profits, thereby encouraging firms to invest even more. This self-reinforcing process produced the longest economic expansion on record, but eventually it also presented Greenspan with an acute dilemma: Had it gone too far, producing an economy that was performing, in some ways, too well?

One day in 1966, Greenspan was walking along Broad Street, near his office, when he ran into Leonard Garment, whom he hadn’t seen since the two of them played tenor sax in the Henry Jerome Band. Garment was now a successful Wall Street lawyer, and one of his legal partners was Richard Nixon, who had moved to New York from Los Angeles after losing the California governor’s race in 1962. Garment saw himself as a Democrat, but he had become involved in the effort to launch a “new Nixon.” Greenspan and he agreed to have lunch at the Bankers Club. There, Greenspan explained to Garment the finer points of financial futures, and Garment asked Greenspan if he would like to meet Nixon. “They met, and I sat with them for an hour or so, over lunch,” Garment recalled. “Nixon was very interested. He made it clear to me that he wanted Greenspan to become involved.” It wasn’t the first occasion on which Greenspan had flirted with Presidential politics. Back in the early fifties, Arthur Burns, who had been Greenspan’s mentor at Columbia, had offered him a job on the Council of Economic Advisers, which Burns headed during the first Eisenhower Administration. Greenspan decided against taking it. But now he agreed to join Nixon’s policy team, which was based in New York, in a building on Park Avenue. For the following twenty years, he was to spend his time moving back and forth between Wall Street finance and Washington politics.

Greenspan’s province extended well beyond economics, to areas such as housing, crime, and welfare. He even cranked up his office computer and developed a mathematical model of the electoral college, which was used for political strategizing. When Nixon defeated Hubert Humphrey, in 1968, he put Greenspan in charge of budget negotiations during the transition. Many observers thought Greenspan would end up as White House budget director, but he returned to Wall Street instead. “Nixon wanted Alan to come in—he could have had a substantial appointment,” Martin Anderson, a fellow Ayn Rand enthusiast who was also a member of the policy team, told me last month from his office at the Hoover Institution, where he is a fellow. “He said no. He wanted to stay with his company.” I asked Anderson about Greenspan’s politics in those days. “His views were exactly the same as they are now. They haven’t changed at all,” he replied. “He’s a Greenspan conservative, which means that on most issues he would be called a conservative Republican, but on some issues he wouldn’t.” A little-known example of the latter, Anderson went on, was Greenspan’s role in the ending of the draft. After Nixon was elected, he set up a commission, under former Secretary of Defense Thomas Gates, Jr., to study the issue. Greenspan was appointed to the commission, and he argued for radical reform. When the commission’s report was published, in 1970, it recommended an all-volunteer military, giving Nixon the political cover he needed to eventually end the draft.

In July, 1974, Herbert Stein, the chairman of the Council of Economic Advisers, resigned, and Greenspan was nominated to replace him. But Watergate was in full swing, and the nomination languished. By late summer, it seemed likely that Vice-President Gerald Ford would soon replace Nixon. Ford asked William Seidman, one of his senior aides, whether he should proceed with Greenspan’s nomination. Seidman, who later headed the Federal Deposit Insurance Corporation and is now a commentator for CNBC, met Greenspan, and approved him. “I thought he was a good economist and a Republican economist, which there weren’t a lot of in those days,” Seidman said to me last month. “He assured me that he was pure economist and not politician. It turned out that he was a better politician than any of us thought.” A couple of weeks before Nixon resigned, Greenspan went to see Ford. “We spent about an hour together, and, to be honest with you, I was very impressed with him,” the former President told me when I called him at his office in Rancho Mirage, California, a couple of weeks ago. “I could tell he was very thoughtful. I just took an instant liking to him. It turned out to be a good judgment.”

The Ford Administration soon found itself faced with the deepest recession since the thirties: inflation was high and unemployment was rising sharply. Some people in the White House were calling for big tax cuts to get the economy moving, but Greenspan opposed such a policy, on the ground that it would increase the budget deficit, which was already at a record level. The White House budget office put together two possible fiscal packages. Ford recalled for me the debates that followed: “Alan analyzed them and said, ‘Look here, if you take the conservative one, you will be accused of being too tightfisted, but in the long run, if you are reëlected, you will have good economic times in 1977, ’78. On the other hand, if you take the more expansive choice you may get some good times in 1976, but if you are reëlected you will pay a penalty, because you will go through another economic downturn in 1977, ’78.’ I said to him, ‘Well, what do you recommend?’ He said, ‘I think it would be wise to take the more conservative one, even though you’ll probably get some politically unattractive statistical data in September or October, just before the election.’ We took the conservative approach, and, sure enough, in October unemployment had a little upshot and things didn’t look so encouraging.” There was a pause on the line, then Ford continued. “I happen to think that was the major reason we lost the election. In November, if you go back and look at the records, the situation turned very optimistic.” I asked Ford, who lost to Jimmy Carter by just two per cent of the vote, whether he regretted following Greenspan’s advice. “I have no regrets,” he replied, his voice firm. “My conscience has always been clear. It was one of those gambles. It didn’t turn out politically, but it was good for the country.”

A quarter of a century after Greenspan’s advice may have cost Ford his reëlection, the two are firm friends, and occasional golf partners. Ford, a keen player, told me that Greenspan, who swings left-handed, “isn’t a bad golfer for a person who doesn’t play very much.” Greenspan has always respected Ford’s honesty and integrity. He has told friends that, of the five Presidents he has dealt with, Ford was the one he felt closest to.

After the 1976 election, Greenspan returned to Wall Street, but he continued to dabble in Republican politics. When Ronald Reagan became President, in 1981, he appointed Greenspan to his Economic Policy Advisory Board, a body of outside experts which also included Arthur Burns, Milton Friedman, George Shultz, William Simon, and Paul McCracken. As Martin Anderson, who at the time was Assistant to the President for Policy Development, tells it, Greenspan and the others played an important role in persuading Reagan to stick with his controversial policy of tax cuts despite the enormous budget deficits they produced. “After a few months went by, Don Regan”—the Treasury Secretary—”and David Stockman”—the budget director—”became very concerned about the growing deficit,” Anderson told me. “They wanted to slow down the tax cut, delay it, stop it. So I would go out and call George Shultz, and he’d call a meeting, and all these guys would come in. They’d gather in the Roosevelt Room. The President would come in and wink at Arthur Burns, tap Friedman on the shoulder, laugh with Alan Greenspan, and talk a bit. They were his old friends. They all sat there and told him two things: one, he was a terrific President; two, to continue what he was doing. It was the right thing to do. It was the only way to get out of the recession. Then they’d all leave, and we’d go back and start over again.” Greenspan and his colleagues believed they were advocating big tax cuts matched by equally big spending cuts, but that was never a realistic possibility. The tax cuts went ahead, Congress refused to cut spending significantly, and the budget deficit exploded; by the time Greenspan became Fed chairman, in August of 1987, it was running at more than two hundred billion dollars a year.

Greenspan was nominated to the Fed post by President Reagan, who acted on the advice of his then Treasury Secretary, James Baker. Baker was yet another political heavyweight whom Greenspan had cultivated. His ability to impress influential people, although rarely remarked upon, is, in many ways, the key to his success. Anderson, who watched Greenspan work with two Presidents, puts it down to a combination of brains, common sense, and trustworthiness. “In Washington, that’s golden,” Anderson told me. “If you get someone who’s smart, who recommends things that work, and who can be trusted, he’ll stay forever. I don’t care what party he’s in.” William Seidman, who worked with Greenspan during the Ford and Bush Administrations, offered a tarter explanation. “He has the best bedside manner I’ve ever seen,” Seidman said. “He’s very nonconfrontational, but also very good at persuading people. Part of his mystique, I think, is that he’s hard to understand, but that also gives him a certain genius aspect.”

It was Greenspan’s cozy links with the rich and powerful which caused the most embarrassing incident of his career. In 1984, the New York law firm of Paul Weiss, Rifkind, Wharton & Garrison hired him to conduct a financial study of one of its clients, the fast-growing Lincoln Savings & Loan Association, of Irvine, California. Lincoln, which was owned by Charles Keating, Jr., an Arizona entrepreneur, wanted federal banking regulators to exempt it from a rule that limited the percentage of depositors’ money it could channel into real-estate development and other direct investments. In February, 1985, Greenspan wrote a letter to the regulators in which he described Lincoln’s management as “seasoned and expert in selecting and making direct investments,” and praised it for having “restored the association to a vibrant and healthy state, with a strong net worth position.” Lincoln didn’t receive the exemption it wanted, but it continued to grow rapidly and to invest in risky areas. In April, 1989, it was taken over by the government at a cost to taxpayers of two billion dollars. “Of course I’m embarrassed by my failure to foresee what eventually transpired,” Greenspan told the Times a few months after Lincoln went belly-up. “I was wrong about Lincoln. I was wrong about what they would ultimately do and the problems they would ultimately create.”

Greenspan’s links to Charles Keating were raised at his confirmation hearings in 1987, but more was made of his history as a Republican adviser. The men who created the Fed, in the years before the First World War, knew that capitalism and democracy were a combustible combination, one that could, all too easily, lead to inflationary spirals, speculative manias, and terrifying busts. The only way to remedy these problems, they believed, was to create an independent custodian of American capitalism, a prestigious individual who could be part umpire, part policeman, and part preacher.

The opportunity for Greenspan to prove his independence arrived quickly. Between March, 1988, and March, 1989, the Fed raised short-term interest rates from six and a half per cent to almost ten per cent, to head off inflation. The resultant recession didn’t start until August, 1990, and lasted less than a year, but as 1992 approached President Bush’s economic advisers grew increasingly concerned that the Fed was not cutting interest rates quickly enough to insure a vigorous recovery. Nicholas Brady, the Treasury Secretary, was an old pal of Greenspan’s from Wall Street, but that didn’t prevent Brady from repeatedly calling for more interest-rate cuts. The friendship between Brady and Greenspan turned increasingly sour. At one point, Brady even cancelled his weekly lunches with the Fed chairman. After Bush’s defeat, some Republicans blamed Greenspan for losing them the election. (Arguably, it was the second time he had cost the G.O.P. the White House.)

With Bill Clinton’s arrival in the Oval Office, in 1993, relations between the Fed and the White House improved sharply. Part of it was personal chemistry: Greenspan was impressed by the new President’s agile mind, which could pick up complicated economic concepts quickly, and by his willingness to adopt conservative financial policies. (Greenspan has told colleagues that he regards Clinton and Nixon as the two smartest Presidents he has dealt with.) Part of it was politics: the Clinton Administration, unlike its predecessor, made little attempt to bully the Fed. This was not accidental, as Robert Rubin, who headed the National Economic Council for the first two years of the Clinton Presidency, explained to me: “What happened in the past was that Presidents tended to get upset when whatever the Fed chairman was doing wasn’t consistent with their purposes. This President had the good sense to recognize from the very beginning that by not trying, even verbally or rhetorically, to interfere with the activities of the Fed, he himself could gain credibility with respect to economic issues. And he was right.” The Fed chairman resumed his weekly lunches with the Treasury Secretary, who was now Lloyd Bentsen. These meetings continued when Bentsen was succeeded, in 1994, by Rubin, and when Rubin was replaced, last year, by Larry Summers.

The entente cordiale between the White House and the Fed has been one of the distinguishing features of the Clinton Administration. Bob Woodward, in his 1994 book, “The Agenda,” suggested that Greenspan reached an agreement with the Clinton Administration, in which the Fed chairman promised to keep interest rates steady if the White House delivered a credible budget-reduction package. “Not true,” Rubin said to me. What actually happened, Rubin went on, was that the President assumed that a substantial budget package would give the Fed more leeway to keep interest rates low, and this helped persuade him to adopt a strict fiscal policy. “But it was an assumption as opposed to a deal,” Rubin insisted.

The Marriner S. Eccles Federal Reserve Board Building, built in 1936, is an austere white marble box extending for an entire city block along Constitution Avenue between Twentieth Street and Twenty-first Street. Visitors pass through security on the C Street side and find themselves in a large open area dominated by Doric columns and a grand marble staircase. At the top of the staircase and through a hallway is the Fed’s inner sanctum: a long corridor lined by the governors’ offices and a large, ornate boardroom that was used during the Second World War for the Arcadia Conference, at which Roosevelt and Churchill mapped out the Allied campaign against Hitler.

Eight times a year, the boardroom houses a meeting of the Federal Open Market Committee. (The committee has twelve seats: seven are taken up by Fed governors appointed by the President; the five others rotate among the presidents of the twelve regional Reserve Banks. At the moment, two of the governors’ seats are vacant.) The meetings begin with charts and a presentation by Michael Prell and Karen Johnson, the Fed’s top staff economists. It is one of the Fed’s many peculiarities that these officials are paid substantially more than the Fed chairman. (Prell earns about a hundred and seventy-five thousand dollars a year, Greenspan just over a hundred and forty-one thousand.) After Prell and Johnson, Greenspan goes around the table and asks each committee member for his or her opinion before stating his own. This process is not just ceremonial. There are seventeen people currently eligible to serve on the F.O.M.C., and thirteen have doctorates in economics. Greenspan is the undisputed leader all the same, and the other members are reluctant to vote against him. “He produces consensus in the same way other good leaders do: by listening extremely closely to what others have to say, by synthesizing that very well, and by sensing the broad middle,” Roger Ferguson, the Fed’s vice-chairman, told me. “Also, he clearly has a point of view about the economy. He presents it in speeches. He presents it privately as well.”

The current debate within the F.O.M.C. is not whether to raise interest rates further but by how much. Greenspan, after playing the Randian hero, liberating the forces of Internet capitalism, has now reverted to the more traditional central banker’s role of restraining a rampaging economy. Complicating his thinking is the stock market. In a now famous December, 1996, speech, he posed the question “How do we know when irrational exuberance has unduly escalated asset values?” The query wasn’t purely rhetorical. For the next year or so, Greenspan and his staff studied the question, before concluding that it couldn’t be answered sensibly. With no signposts to guide him, Greenspan decided that the Fed should stand aside and let the stock market find its own level. Whether or not the decision was soundly based—some observers, including me, have argued it wasn’t— it proved unsustainable. Eventually, the rising stock market revved up the economy to such an extent that Greenspan could sit on his hands no longer.

He is now in the awkward position of arguing, simultaneously, that the Fed needs to restrain the economy; that the economy is zooming mainly because of the rising stock market; and that the Fed is not targeting stock prices. In principle, the three statements might be reconciled—although not easily. In practice, if Greenspan is determined to slow down the economy he will almost certainly have to keep raising interest rates until the stock market cracks (not merely shakes). He still believes it is impossible to determine with certainty when a healthy bull market turns into a speculative bubble, but he has also told colleagues that he now suspects that what is happening on Wall Street has elements of a bubble. He is particularly alarmed by the spread of computer day-trading, which he compares to casino gambling. In lighthearted moments, he has been heard to suggest that all day traders should be forced, before they start trading, to take an examination in which they are asked to identify the products of the companies that they intend to buy and sell.

With the Fed raising interest rates, the big question is whether the bubble will deflate gradually. History doesn’t teach any simple lessons. In 1929 and 1987, Fed interest-rate hikes were followed, at some distance, by stock-market collapses. In Japan a decade ago, the central bank raised interest rates explicitly to burst a speculative bubble. There was no collapse, but a slow, inexorable decline in stock prices ensued. Greenspan is well aware that another stock-market crash is a real possibility, but that threat probably won’t deter him from raising interest rates further if he believes it is necessary. To him, the Fed’s primary duty is to keep the economy on a sustainable course of growth. He also believes that a Wall Street crash would not necessarily be such a bad thing for the economy, as long as the Fed acted wisely in its wake. “Remember the big one-day decline we had back in October 1987?” he asked Lawrence Lindsey. “Its impact on the economy was not all that great. Then, there was the severe decline in stock prices in Japan early in this decade. True, it took growth out of the system, but most of what they have experienced since is the result of an increasingly corrosive nonperforming loan problem. There’s no guarantee that even if you get a 1929, you’ll end up with a 1932.”

Greenspan and Mitchell live in a renovated three-bedroom farmhouse, which Mitchell bought when she moved to the capital in 1976. Every day, Greenspan gets up around five-thirty and spends an hour or two sitting in the bath, reading and writing. These early-morning soaks have acquired near-mythical status, but they are real enough. Greenspan started taking them in the early seventies, after he injured his back. He discovered that the water helped his brain as well as his disks—he often says his I.Q. is fifteen points higher at five-thirty in the morning than it is at five-thirty in the afternoon—and many of his important speeches are conceived or reworked in the tub. “Things do get wet,” Mitchell said to me. “I’m amazed that his staff is able to read his chicken scratches, one word bleeding into the next.”

When Mitchell isn’t out of town on assignment, she and Greenspan like to spend their evenings at home, often eating food prepared for them by their longtime housekeeper. Mitchell is something of a gourmet, but Greenspan likes plain food, such as grilled fish and vegetables. Occasionally, he drinks a glass of wine, but not often. The night before I spoke to Mitchell, they had eaten at home and Greenspan had watched the Baltimore Orioles in their first televised spring-training game. The couple had their first date in 1984, but Greenspan didn’t get around to proposing until Christmas Day of 1996. Mitchell says the long courtship didn’t bother her. “I knew he was committed to me, and that we planned to spend the rest of our lives together,” she told me. Mitchell is fifty-three, twenty-one years younger than her husband, but she said that the age difference has never been a factor. “He’s very boyish, he’s athletic, and Alan’s curiosity is such an important part of his makeup,” she said. “He’s wide open to possibilities.”

Greenspan and Mitchell are regulars on the Washington social circuit, where their friends include Jim Lehrer, of “NewsHour,” and his wife, Kate, a novelist; the CNN anchor Judy Woodruff, and her husband, Al Hunt, of the Wall Street Journal; Katharine Graham, of the Washington Post; the former C.I.A. chief William Webster, and his wife, Lynda; and James Wolfensohn, the head of the World Bank, and his wife, Elaine. Webster is Greenspan’s regular tennis partner at Chevy Chase Country Club. Last year, they made the semifinals in the seniors section but lost in a tiebreaker. The Wolfensohns own a house in Wyoming, which Greenspan and Mitchell visit every August when the Fed chairman has to go West for the Kansas City Reserve Bank’s annual policy conference, in Jackson Hole. For Greenspan and Mitchell, as for many of their friends, work and play are usually intertwined. Their honeymoon was a weekend in Venice tacked on to a bankers’ meeting in Basel, Switzerland, which Greenspan had to attend. When I asked Mitchell if she thought her husband had ever considered retirement, she laughed and said, “This is not a man who will ever retire. He is too alive and too interested. For an economist, he’s got the best job imaginable.”

A few weeks ago, I got an idea of what Mitchell meant when I went to a conference at Boston College, where Greenspan was a keynote speaker. As far as I could tell, practically every Massachusetts resident over forty with an annual salary of more than two hundred thousand dollars was in the audience. Edward Markey, a Massachusetts congressman, introduced Greenspan as the “Babe Ruth of our economic policy.” It happened to be the Fed chairman’s seventy-fourth birthday, and before he started to speak a chocolate cake with six lighted candles was carried onto the stage. As Greenspan bowed his head to blow out the candles, Markey led the audience in a rousing chorus of “Happy Birthday, Mr. Chairman.” When the singing was over, Greenspan ambled to a microphone and said, in his best Woody Allen manner, “If I’d known all of this was about to happen, I would have been on my way to San Francisco.” After the laughter subsided, he reiterated his suspicion that “we are now living through a pivotal period in American economic history,” in which the growing use of information technology was bringing about “dramatic changes in the way goods and services are produced and in the way they are distributed to final users.”

The crowd gave Greenspan a standing ovation. But pivots can swing both ways. In 1929, the revered Fed chairman Roy A. Young saw his good name destroyed overnight by the Great Crash; in the early nineteen-seventies, Greenspan’s old mentor Arthur Burns was similarly tarnished by the onset of stagflation. If Greenspan succeeds in slowing down the economy without provoking a recession, he will, surely, go down as one of the great Fed chairmen. If the speculative boom turns to bust, Greenspan will be held responsible for allowing it to get going in the first place. His current reputation will seem as overvalued as an Internet stock, and he will have to fend off angry investors—many of whom bought into his vision of a New Economy—just as he fought off those Irish toughs long ago on the streets of Washington Heights. Whatever happens, Greenspan will be remembered as the public face of American capitalism as it entered the Information Age, with all the world before it, and all challengers seemingly vanquished. For a true Randian, there could be no better fate. ♦